Agency Mortgage Bonds, Mortgage REITs Try To Stop Fed-Fueled Slide

By Michael Aneiro

Among the many markets spooked by some tough-to-decipher Federal Reserve messages yesterday, agency mortgage-backed securities sold off as that market fears the Fed could cut back on its mortgage-bond purchases. Al Yoon reports in today’s Wall Street Journal on the plunge in MBS issued by Fannie Mae (FNMA) and Freddie Mac (FMCC):

MBS paying the lowest interest rates fell the most since they are the assets targeted by the Fed’s quantitative-easing program. They also are the most vulnerable to rising benchmark rates because the underlying loans aren’t likely to be refinanced as often, leaving investors saddled with low-returning assets longer than expected. Fannie Mae MBS with 3% coupons fell nearly 1 point to their lowest levels in a year and about five times the magnitude of a typical trading day, according to analysts.

“Right now it seems the only source of demand is the Fed, and the private sector is starting to shun [MBS] because of the uncertainty surrounding the intentions of the Fed,” said Brad Scott, co-head of agency MBS trading at Bank of America Merrill Lynch.

Shares in mortgage real-estate investment trusts also fell Wednesday on fears of Fed tapering and could struggle Thursday as stocks try to find some footing after an overnight selloff in Asia. American Capital Agency Corp. (AGNC) finished down 0.9% to $28.29, while Annaly Capital Management (NLY) was also down 0.9% to $14.52.